On Tuesday, April 30 the New York State Senate Standing Committee on Finance will hold a public hearing to discuss the issue of divesting the New York State Common Retirement Fund from fossil fuels as outlined in recently proposed state Senate Bill S.2126. The hearing for the bill comes amid calls from select New York politicians to support divestment for political gain. Unfortunately for New York retirees, this bill – along with previous proposals – ignores the financial reality of divesting.
Divestment efforts at the state level have failed many times before for this very reason, and the costs and ineffectiveness of divestment have been pointed out again and again. In fact, a 2018 study found that divestment could mean millions in annual losses for New York’s $200 billion pension.
The study by Prof. Daniel Fischel of the University of Chicago Law School, and co-authors Christopher Fiore and Todd Kendall of economic consulting firm Compass Lexecon, examined the potential impact of a narrow divestment policy that includes oil, natural gas and coal, as well as a broad policy that also includes utility stocks, to determine the financial implications of such an investment strategy. Using all available data on current holdings to calculate returns, the report found that New York stands to lose $136 million under the narrow divestment scenario and upwards of $198 million under the broad strategy. These losses are equivalent to eliminating the average annual benefits for over 8,500 retirees of the Employee’s Retirement System. Over 50 years, the costs of divestment for New York State add up to between $1.1 trillion and $1.5 trillion.
Ahead of the hearing, Divestment Facts spokesperson Matt Dempsey called to light why divestment is the wrong choice for the state:
“Divestment is an empty, ineffective political gesture with a hefty price tag for real people. These aren’t just political talking points – these are millions, if not billions in major losses that hit the pockets of taxpayers and retirees first. When a pension underperforms there are two options: cut benefits to pensioners or leave taxpayers to foot the bill. Rather than play politics with the money of others, New York’s leaders should listen to their Comptroller and focus on solutions that actually support the environment and put to rest this ineffective investment strategy that is all politics.”
To date, divestment activists have failed to sway the person responsible for the performance of the state pension, Comptroller Tom DiNapoli. Just earlier this month, a Decarbonization Advisory Panel organized to look at the future of the fund through the lens of climate change opted to instead propose a “larger, carefully thought out investment strategy” for New York’s pension fund that “looks at the whole picture.” DiNapoli has maintained that he prefers engagement with fossil fuel companies over divestment, placing his fiduciary duties over a symbolic gesture.
Critics have called into question the constitutionality of senators pushing this divestment effort in the first place, and much remains to be seen from Tuesday’s hearing, but one fact remains crystal clear: Divestment is all talk and no benefit for New York pensioners, taxpayers, or the environment.
New York Commentators Oppose Divestment
New York State Comptroller Tom DiNapoli (2019): “As the Legislature considers proposals seeking to address climate change, I trust you will keep in mind that the New York State Constitution guarantees to public employees the right to have an independent trustee exercising his or her independent judgment in managing the Fund for their exclusive benefit, and prohibits any infringement of that independence by legislation. While I am always open to discussing how to continue the work of protecting the Fund from climate risk, I must preserve the independent judgment required of my fiduciary duty. Consistent with this duty, I reiterate that addressing climate risks and seizing investment opportunities require a multifaceted strategy based on sound financial analysis.”
New York State Comptroller Tom DiNapoli (2019): “There is no evidence that divesting the Fund from owners of fossil fuel reserves would do anything to actually mitigate climate change…An investment decision such as divestment requires a financial and economic analysis demonstrating that divesting would not have a negative economic impact on the Fund…Divestment must only be for financial reasons, not symbolic purposes.”
The Business Council of New York (2018): “Research has shown that divestment substantially harms financial performance over the long term. Pensions systems all over the country have studied the merits of divestment and have rejected the notion, often because it is not financially prudent and did not benefit the environment. Our state and city pensions provide benefits to New York’s many public employees. They were designed to provide municipal workers and retirees a secure financial future—not to be sacrificed to achieve a headline.”
Suffolk County Association of Municipal Employees (2017): “Divestment is indiscriminate. It preempts thoughtful fiduciary analysis to assess the impact on the Fund… Additionally, fossil fuels are meaningfully integrated into nearly every facet of the global business sector. To divest immediately would be akin to telling the world not to breathe air…Given the unique role of the energy sector in the economy, investors that chose to remove traditional energy from their investments reduce the diversification of their portfolios and thereby suffer reduced returns and greater risk. Investor costs are further compounded when considering the additional costs of transactional fees, commissions, and compliance costs that are unavoidable when divesting.”
Peter Meringolo, Chairman of the New York State Public Employee Conference (2018): “We understand that climate change is real but what is lost in this debate is that there have been no studies proving that fossil fuel divestment would make any significant progress toward addressing climate change… The bottom line is that the retirement accounts of working families should not be used as political bargaining chips in the debate over climate change.”
Richard Mulvaney, General Counsel to the New York State Troopers and NYSPEC (2018): “I want to talk about the fiduciary responsibility that Tom DiNapoli has been mandated to undertake. You understand that this is the highest legal duty that is imposed on an individual to… take actions [on the behalf of] people who depend on him the most, the pensioners of the State of New York. That is a legal mandate and any time a legislature wants to legislate or order him to do something that is against his fiduciary responsibility—he places himself and our pension in great legal peril.”
Professor Daniel R. Fischel of the University of Chicago Law School and President of Compass Lexecon (2018): “New York and Colorado have both come under political pressure to give up pension investments in fossil fuels, but at what cost? Our research shows that large pension funds stand to lose a substantial amount of value if they decide to adopt a divestment policy. The energy sector plays an important role in diversifying a given portfolio, so eliminating that exposure means higher risk and reduced returns to the tune of millions if not trillions of dollars over an extended timeframe. These types of costs leave pensions to make a hard choice: reduce pensioner benefits or increase contributions from taxpayers to the fund.”
New York City Comptroller Scott Stringer (2017): “When you make a divestment decision you have to go through the fiduciary lens of our retirement system and our retirees. I commend our retirees for being here, but I don’t just represent the couple of dozen that are here, I actually represent 715,000 who depend on us for their retirement security(…) I understand that people want to divest, but I have to come back to you with the real knowledge of what we can do but I’ll also be honest with you to tell you what we can’t do. I owe it to you, but I also owe it to the woman who struggles on the small pension, the mother who I taking care of her kids, the dad who was a coal miner.”
New York State Comptroller Tom DiNapoli (2015): “My fiduciary duty requires me to focus on the long-term value of the Fund. To achieve that objective the Fund works to maximize returns and minimize risks. Key to accomplishing this objective is diversifying the Fund’s investments across sectors and asset classes – including the energy sector, where fossil fuels continue to play an integral role in powering the world’s electricity generators, industry, transportation and infrastructure.”